Startup Equity as a Retirement Plan

This article was originally published here

Many startup employees are drawn to the idea of a sizable payout and an early retirement, but the tactic may depend more on luck than competence.

Trevor Ford quit his position at Lending Tree over two years ago to work at Yotta, an online banking startup, where he had access to a 401(k) plan and a substantial employer match.

Yotta, like many early-stage startups, didn’t provide its employees with a 401(k) plan when Mr. Ford started working there. Instead, as equity compensation, Mr. Ford received incentive stock options, which allowed him to purchase company shares at a reduced price. He thinks investing in early-stage equities offers a better chance to build wealth than participating in an employer’s 401(k) plan with matching contributions.

The 33-year-old Mr. Ford, who resides in Austin, Texas, stated that the equity “may be valued well into the seven figures, hopefully, and maybe more.” That would be sufficient to retire on. However, Mr. Ford’s equity won’t be worth anything unless Yotta is a profitable public corporation. Yotta recently provided access to a 401(k) plan but does not match employee contributions (Mr. Ford makes a minor contribution).

Employees who switch from a corporate position with a typical 401(k) plan to one at a startup that offers equity have a rare chance to get a sizable payoff when they are still relatively young. Although there is a much higher chance of success than with a conventional retirement plan, the equity is worthless until it is purchased or the business goes public.

Jake Northrup, a certified financial planner in Bristol, Rhode Island, specializes in assisting Millennials with managing their equity compensation. Investing in a 401(k) is comparable to running a marathon, while investing in company equity is comparable to sprinting. If a startup succeeds, Mr. Northrup continued, “you might be able to achieve financial independence at a very young age via your company shares.” According to him, about 20% of his clients have benefited in some way from equity.

In part, because he saw his friend Andy Josuweit, the founder and CEO of Student Loan Hero, earn a sizable payment when LendingTree bought the startup for $60 million in cash in 2018, Mr. Ford is relying on the stock. According to Mr. Ford, at age 31, he obtained a sum of money that changed his life.

Of course, not every startup succeeds. According to research done this year by CB Insights, a company that examines venture capital and startups, 70% of startups fail.

Chris Chen, a certified financial adviser of Lincoln, Massachusetts-based Insight Financial Strategists, said, “You have to keep in mind that things might not work out. When you’re between your twenties or in your thirties and working for a startup, it may seem time will never end, but eventually, you’ll have to retire.”

Among the initial dozen workers of a rapidly expanding tech startup in Missouri, Annie Fennewald spent nearly seven years there. Ms. Fennewald, 44, could retire around eight years sooner than she had anticipated in May after selling her stock through a private equity deal.

Despite receiving a seven-figure payout, Ms. Fennewald claimed that her equity wasn’t her only retirement strategy.

She said, “I always thought of stock as a lottery ticket.” Although I didn’t bank my retirement on it, it might be valuable. She made the maximum contribution to the company’s 401(k) plan when it became available four years ago. When a startup has 50 or more employees and exits early-stage funding, it frequently offers a 401(k) plan.

However, not everyone is in a position to sell their equity.

A customer of Columbia, Missouri’s Danielle Harrison, a certified financial planner, wants to retire but is holding out for her business to go public so she can cash in roughly $2 million in equity. Being entirely dependent on something like that isn’t easy, according to Ms. Harrison, proprietor of Harrison Financial Planning.

This sums up what you need to know if you’re a startup employee thinking about forgoing a more conventional route to retirement savings in favor of depending on stock.

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M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementing a sound plan for your retirement. We are committed to helping you achieve your goals. Visit us at MarvinDutton.com . Tel. 212-951-7376: email: [email protected].